Limited Liability Partnership (LLP) – Explained
A limited Liability Partnership (LLP) is a combination of an ordinary partnership and a company form of business. Just like a company, members of the LLP aren’t personally liable for any debts the business can’t pay. In such partnership personal liability is limited to their share of contribution. On the other hand, just like an ‘ordinary partnership’, the relationship between the members is governed by a private LLP agreement. Also, the income of LLP is taxable as any other partnership.
Setting up an LLP
To form a LLP you need to:
- choose a name
- have a registered address - this will be publicly available
- have at least 2 ‘designated members
- have an LLP agreement in place,
- register the LLP with Companies House
How to pick a name for LLP?
Naming a business gives it an identity. Hence, both registered name and business name need to be included in all official paperwork, like invoices, letters, etc. along with the partner’s name.
Registered name for an LLP
- Needless to say, it cannot be the same or similar to another LLP`s. For further reading to understand ‘same as’ name click here
- It can` be a ‘too like’ name. For further reading to understand ‘too like’ name click here
- Ends with ‘Limited Liability Partnership’, ‘LLP’, if in Wales their Welsh equivalents
- Can`t be offensive
- Can`t contain a ‘sensitive’ word or expression, or suggest a connection with government or local authorities, unless you have permission to use such word or expression.
You need not necessarily trade using the ‘registered name’ only. You can choose to have a separate ‘business name’ for trade purposes. The business name is not required to be registered. While choosing a ‘business name’ following things shall be taken care of:
- It should not contain a ‘sensitive’ word or expression or suggest a connection with government or local authorities unless you get permission.
- It should not be the same as an existing trademark.
- It should not contain a ‘sensitive’ word or expression unless you get permission.
- It should not be another company’s trademark.
LLP agreement is a statement that sets out the roles and responsibilities of each of the members. It states the matters agreed between the LLP partners in relation to the internal workings of the LLP. Some of the matters covered in the LLP agreement are:
- The business model of the LLP
- Profit-sharing mechanism
- Members’ responsibilities
- Joining and leaving the LLP
Having a registered address for partnership business is a mandatory requirement. The address so registered as the principal place of business will be the place where is where official communications will be sent. It must be a:
- A physical address
- The main place of business
- Located in the same country where the limited partnership is registered. For example, if you have a limited partnership registered in Scotland then you must have a registered office address in Scotland.
Register LLP with Companies House
You can register your LLP by using either of these:
- By third party software: You can use third-party software to register the LLP. It takes up to 24 hours. Fees vary.
- By post: You can download and fill the registration form and send it to Companies House along with fees of £40.
- Through agent: There are several formation agents who can assist you in registering your LLP.
Designated and ordinary partners of LLP
There need to be at least 2 ‘designated members’ and any number of ‘ordinary members’ at all the time during the life of LLP. Let’s put this in a simple equation as follows:
2 ‘designated partners’ + any number of ‘ordinary partners’ = LLP.
A. All members
- Both ordinary and designated partners need to carry out the duties and meet their legal responsibilities set out in the LLP agreement.
- All members must register for self-assessment as the share of profits from partnership business is taxed as personal income for the partners.
B. Designated members
Besides being responsible for carrying out duties as per the LLP agreement, designated members have an extra responsibility of ensuring the LLP and its members meet all statutory requirements and obligations.
- Most important being to register the limited liability partnership with the Companies House.
- Register the LLP partnership business and themselves separately for self-assessment with HMRC.
- Register for VAT if the VAT taxable turnover crosses or is about to cross £85,000.
- If needed, appointing an auditor.
- Maintain accounting records.
- Prepare, sign, and send annual accounts to Companies House.
- Send a confirmation statement to Companies House.
- Report Companies House about any changes.
- Act for the business if it’s wound up and dissolved.
Salaried members of LLP
If members of an LLP are on salary, they`re treated as employees for Income Tax and National Insurance contributions purposes. The reason being salaried members are engaged on terms that are closer to employment than self-employment. There are 3 conditions stated in section 863B to 863D of ITTOIA 2005 that ALL have to be satisfied for a person to be a salaried member. If a member is then classified as a salaried member then:
- Such members will be treated as being employed by the LLP under a contract of service instead of being a member of the partnership.
- Their rights and duties as a member of the LLP will be treated as rights and duties under that contract of service.
- The LLP must operate PAYE and deduct Income Tax and Class 1 NICs from the salaried member’s earnings just like any other employee.
- The salary so received by the member will not be taxable as self-employed income for Income tax and NIC.
Incorporation document is not same as LLP agreement.
It is required to be submitted to the registrar for the purpose of incorporating the LLP. All the members must subscribe to it. It contains following details:
- Name of LLP
- Place, etc. England, Wales, Scotland or Northern Ireland and Registered office address
- Particulars of each of the persons who are to be members upon incorporation of LLP
- Names of the designated partners
- Statement of initial significant control
Reporting the changes
Whenever there is any change to the limited partnership it needs to be informed to Companies House. Changes include, change in:
- registered address
- registered name
- address where LLP’s records are kept
- type of business activity
- partners’ details like changes of name, addition of new partner etc.
You can inform Companies either online or through various forms. It must be signed and sent by post or delivered to the Registrar of Companies for registration within seven days of the changes taking place.
Taxability of income
All partnerships, whether a limited partnership or LLP are pass-through entities, meaning all profits of the partnership business are “passed” to the partners and taxed as personal income for the partners instead of being taxable in the hands of the partnership itself.
Difference between LLP and limited partnership
Click here to know the difference between LLP and a limited partnership.